Jun 27, 2022
It’s every homebuyer’s dream: You saw a house you loved and made an offer the seller accepted. Hurrah! Then you went through all the usual steps of homebuying—such as negotiating a contract and agreeing to certain contingencies—to get you to the closing table.
But in the end, your homebuyer’s dream scenario turned into a nightmare because the home purchase didn’t close, quite possibly through no fault of your own. Maybe the seller failed to clear the title or complete repairs by target dates. So you had to pull out of the deal.
Then, the plot twist: The seller relisted the house and refused to return your earnest money.
Is the seller legally able to withhold a buyer’s earnest money, even if the house is relisted? Let us help you make sense of this stressful situation.
What is earnest money?
Giving a seller earnest money is one of the first steps in the homebuying process after the seller accepts an offer. A buyer gives the seller a percentage of the accepted offer to show he’s serious. While it doesn’t fully lock a buyer into the deal, it does certainly make it less likely the buyer will back out.
“The money is usually held in the seller’s attorney’s escrow account until closing,” says real estate professional Maggie Chong, of New York’s Serhant. The money is also sometimes held by a title company or real estate brokerage firm in a trust account.
Without earnest money, a seller wouldn’t know if a buyer was making willy-nilly offers on homes until he picked a favorite. That’s why most sellers won’t accept an offer without a buyer’s earnest money. It proves the buyer is making the offer in good faith.
How much is earnest money?
Typically, earnest money comes out to 1% to 2% of the total home purchase price. But in some hot real estate markets, a buyer may have to cough up as much as 2% to 3%. But the opposite holds for slower markets, where a buyer can put as little as 1% down.
When does a buyer get the earnest money back?
If the deal goes south, a small cancellation fee is generally taken out of a buyer’s earnest money deposit. Then either the trust company or real estate firm determines whether a buyer gets the earnest money back. And that decision all comes down to the terms of the sales contract.
So check your purchase agreement. It should spell out the circumstances in which you’ll get your earnest money deposit refunded. For example, purchase agreements usually have contingencies that stipulate that earnest money will be returned if a home fails inspection or can’t get title insurance due to a lien on the property.
A financing contingency—wherein the buyer cannot obtain financing—will also ensure a buyer’s right to an earnest money refund.
When doesn’t a buyer get the earnest money back?
If the buyer fails to meet deadlines within the time frame of the contract, that buyer is considered to be in default and will forfeit the right to any earnest money. For instance, if a buyer doesn’t complete an inspection by an agreed-upon deadline, the seller may be able to keep the earnest money.
But in the worst-case scenario, a seller may just decide to keep a buyer’s earnest money based on no legal grounds. This can happen even if the seller is the one in default.
Can the sellers relist while they have another buyer’s earnest money?
The sellers can relist their home. But they can only accept an offer contingent on the successful cancellation of your offer.
If you’ve been waiting a month or more for the return of your earnest money and the seller refuses to sign the cancellation, take action. As a first step, call the broker of the company that has the home listed and see if you can make any headway.
What other recourse does a buyer have to recoup the earnest money?
“A buyer can also pursue an escrow dispute resolution process with the real estate professional who assisted them,” says agent Lou Sansevero, with Atchley International Realty in Lakewood Ranch, FL.
If that doesn’t work, call a real estate attorney and ask about a statutory cancellation, advises Paul Aspelin, a real estate professional with Beyond Homes Realty in Victoria, MN. “The attorney would file this cancellation and the broker holding your earnest money would legally have to return it, even if no cancellation of the purchase agreement was signed by the sellers. I have seen attorneys charge several hundred dollars to provide this service.”